News

16

Jul 2015

Someone got the roller out – Football insolvencies revisited

Hardly has one season finished, hardly has the joy and despair of the promotion, relegation and cup final battles abated before it’s time to kick off again!

The 2015/16 football season starts on the weekend of 7/8 August. In the giddy heights of the Premiership it remains to be seen whether newly promoted Bournemouth Watford and Norwich have what it takes to play with the big boys both on and off the field. It’s Bournemouth’s first time in the Premiership, Watford’s first appearance for 8 years and Norwich are the bounce back team after being relegated in 2014.

Football is big business these days and the sums bandied around beggar belief (£49m for spoilt brat Raheem Sterling anyone?). As a consequence the financial gains can be huge for those teams that secure continued success but for most teams just surviving from one season to the next is a struggle. There remains a huge dichotomy between football’s rich and poor. Just getting a championship team into the position of becoming promotion challengers requires massive investment and in the absence of a multimillionaire benefactor is beyond the ability of most clubs. And if you fail? Well, the spiral downwards can quickly turn into a tornado – points deductions, best players leaving, TV money drying up and a plummet down the leagues and even insolvency; usually by way of entering into administration. Sad news for the fans and the investors and - you would think - bad news for the creditors. This is not however exactly true.

Are you sitting comfortably? Let me tell you a story…

In the world of corporate recovery football insolvencies have always been contentious primarily because of the operation of the so-called Football Creditor Rules (”FCR”); a series of rules adopted by the FA and Football League in respect of the Premiership and other 3 leagues respectively. Broadly the respective leagues’ rules insist that football related creditors must be paid in full or in priority to the general unsecured creditors before allowing ownership of the entity holding the league registration (which entitles the holder to participate in the league and share in its income - in the Premiership it is the so-called “golden share”) to be transferred. The football creditors are defined as a long list of the usual suspects: - the FA, the League, other clubs, the PFA, pension schemes and all club employees which of course includes the players. By operation of the FCR football creditors get an apparent super-priority over other creditors, hence the press observations that it’s not a “level playing field”.

It has always been easy to characterise these football creditors as some sort of pantomime villains especially by the fans who understandably feel that the young multimillionaires of the Premiership hardly need to be protected. And certainly that is the view of HMRC who have repeatedly challenged the legality of the FCR (recently in the case of Portsmouth F.C. more of which below) as yet without success. The leagues have always been open about their position; it is one of protecting the members of a trade association, membership of which is a valuable commodity in itself. They argue that transfer fees in particular involve huge amounts of money and that in allowing a non-recourse default to occur would skew the whole basis on which the transfer market operates; no one can be allowed to buy a top team on credit, win the trophies and then default on the repayments. The protectionism of smaller clubs in the lower leagues is understandable but has less public sympathy in the Premiership.

An attempt at landscape gardening

One of the football insolvencies that most resonates is the relatively recent administration(s) of Portsmouth. The press were all over the story at the time and were quick to flag that local business were going to suffer £’000s of losses that they could ill afford whilst the football creditors would be paid in full. It made for a great nasty rich v honest poor story at the time. HMRC has always hated football clubs as it perceives it as an industry endemic with outright tax evaders and a plethora of tax avoidance scheme. It’s a view that has lots of public sympathy. In an attempt to level the playing field HMRC objected to Portsmouth’s subsequently proposed CVA (and lost) and then launched an attack on the FCR in the High Court (and lost again). Interestingly what really scuppered HMRC was the fact that the football creditors were being discharged out of Portsmouth’s share of the Premiership TV and sponsorship money? The FA successfully argued:-

that this money was only payable after the club had fulfilled its fixture commitments, and at the time of the challenge the payment had not been triggered

that the FA’s own rules entitled it to deduct (and pay directly) any amounts unpaid by Portsmouth to any outstanding football creditors before any payments to the club itself

that as the payments were made before Portsmouth’s rights to the money crystallised they did not represent an unfair or super-priority distribution out of Portsmouth’s assets

the parri passu (all things being equal) principle that all unsecured creditors rank in the insolvent estate had not been breached.

One-nil to the FA, or so you’d have thought.

However, mindful of the barrage of criticism that the initial administration CVA and second administration of Portsmouth attracted the leagues set about introducing a host of new rules designed to restore credibility particularly to the Premiership. Financial Fair Play rules were introduced and focused on requirements to file accounts on time, provide suitable trading forecasts, granted the FA powers to suspend transfers and payments if covenants were breached, insisted on commitments to keep up to date with the payment of HMRC etc,etc, all designed to eliminate or at least identify at the earliest opportunity clubs with shaky finances. Combined with rules on director and ownership disclosures and qualifications one can see that great efforts were made to prevent another Portsmouth.

All very commendable but it wasn’t based on altruism; a stable Premiership is necessary to keep TV and sponsorship fees high – imagine the disaster that would occur if a team entered administration and was unable to meet all its fixtures? The financial and reputational damage to the Premiership would be catastrophic. In any event the FCR still stand. So a level playing field for creditors is still a long way off.

Have the rollers really come out or is it just mowing the lawn?

The Football League has now gone two whole seasons without a club suffering an insolvency event which is good news really… not because the League tells us so and foregrounds the Financial Fair Play regulations as the cause but because it means that no club’s trade creditor have fallen foul of the FCR. And yet, as the song goes, there may be trouble ahead, as this summer the League got out its rollers and voted in a series of new insolvency rules which on the face of it seem on the face of it to be levelling the playing field.

The main changes are as follows:-

12 point deduction for entering administration (previously 10)

CVA process no longer required as Football League will allow the transfer of the club's share in The Football League to the Administrator's preferred bidder subject to the purchaser’s compliance with the League's other requirements.

This is expected to reduce the insolvency period and the associated professional costs, provide greater certainty that the club will continue and deliver a greater return to creditors. It will also prevent the administration process being controlled by the club's previous owner who in some instances will be the only party able to achieve a CVA. (This is the League’s view)

The Administrator will be required to market the club for at least 21 days during which time he/she will be required to meet with the club's supporters’ trust and provide it with the opportunity to bid for the club.

Unsecured creditors will now receive a minimum of 25p in the pound, payable on acquisition or it rises to a minimum of 35p in the pound payable over three years

Failure to comply will result in a further 15 point deduction at the start of the season

But, as ever the FCR stay in place. Whilst this seems to be a genuine attempt to address the imbalance between football and unsecured creditors has really achieved this? Yes, the creditors are now promised at least a 25% dividend, but in the lower leagues the absence of big TV and league sponsorship money means that the burden of paying off the football creditors will fall directly on the purchaser, and now with the added requirement to fund a hefty unsecured dividend has the league not just priced a “rescue” beyond economic sense? And if a club is bust who’s going to provide the working capital to continue to trade for the 21 day marketing period? Furthermore whilst you no longer need a CVA I’m not sure that this rule change will go down a storm with the HMRC who will feel that they have become even less disenfranchised than before were at least their material vote in a CVA meant they had some influence. Under the new rules their only likely influence will be on voting for the approval of the administrator’s fees but they won’t be able to block a sale. Finally, at the time of writing it is unclear whether the Premier League will be adopting some or all of these rules.

There may be trouble ahead, indeed.

Lee PryorPartner

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